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How the Greek elections will impact the world economy

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Published on Jan 29, 2015

It's difficult to overstate the importance of the January elections in Greece. Greek voters may not know it, but they're likely deciding the fate of the Euro, and one could argue the fate of the world economy. AEI Resident Fellow Desmond Lachman explains why.

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Music
"Biology Slides" by Bleak House (http://www.keshco.co.uk/bleakhouse)

Transcript
It's difficult to overstate the importance of the January elections in Greece. Greek voters might not know it, but they’re likely deciding the fate of the Euro, and one could argue the fate of the world economy.

The January elections in Greece will likely result in radical overhaul of its economic policy. The new government will be headed by the Syriza Party, which is a party on the far-left of the Greek political spectrum. If you look into its history you can’t miss its roots in the Communist Party. Over the past year, Syriza has campaigned on the platform of abandoning the budget austerity policies imposed on Greece by the IMF and the European Union. Instead Syriza is proposing a big boost in social spending and an increase in the minimum wage in an attempt to boost Greece’s very depressed economy. In addition, Syriza will be seeking major debt relief from its official creditors. All of this is bound to put Greece on a collision course with Germany, the financial master of the Eurozone.

Greece’s European partners have no interest in seeing Greece exit the Euro. This will make them predisposed to reaching a compromise on a new lending arrangement. However, there are limits on how much Greece’s European partners can compromise. For any concession that they make to Greece on debt and budget austerity, they would have to grant to counties like Ireland, Italy, and Portugal.

But Syriza will also have major problems in reaching any compromise with debt-holding nations for fear of dividing its party and disappointing its base. This has to raise the real possibility that we’ll see Greece exiting the Euro before the end of the year.

What would a Greek exit from the Eurozone mean for the world economy? A Greek exit is bound to cause financial market contagion to the rest of the Eurozone, particularly for countries such as Italy, Portugal, and Ireland. A financial crisis in Europe would have a large impact on the United States because Europe still accounts for around 30 percent of world output and because Europe is very integrated in the global financial system. Much as the Lehman bankruptcy in 2008 turned out to be a global event, so too would be a full-blown European crisis. 

How the Greek elections will impact the world economy

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